With an increase of 2.1 percent during the first nine months of this year, the U.S. economy is moving along at a pace largely consistent with its physical limits to growth in an environment of somewhat elevated inflation pressures.

Over that period, the economy was driven by a 2.8 percent growth of household spending, contributing three quarters of the total increase in demand and output.

Private consumption accounts for 70 percent of the U.S. economy. Its growth outlook in the coming months crucially depends on jobs, incomes and credit costs.

As things now stand, employment and credit costs look slightly positive.

The 4.6 percent jobless rate in November represents a fully employed economy, where 95.4 percent of the civilian labor force has a full-time job. The labor supply is constant, but 38 percent of active civilian population remains out of the labor market.

The Federal Reserve’s credit policy is roughly neutral. The most important indication of that is that a fully employed U.S. economy currently operates at a rate that is well within the area of its growth potential.

Keep the monetary policy neutral

Household incomes, however, have weakened during the period which is traditionally the most important retailing season of the year. After-tax and inflation-adjusted personal incomes slowed down in the third quarter to an annual increase of 1.5 percent, after a 1.9 percent growth over the preceding six months.

Such a slowdown in consumers’ real purchasing power suggests that households will have to draw down their savings, or to rely on higher borrowing, to maintain their usual lifestyles.

That’s where credit costs come in. They also act as the main driver of demand for consumer durable goods (“big ticket items,” such as furniture, appliances, vehicles, etc.) and residential investments which spur spending on durable and nondurable consumer goods.

Taken together, private consumption and residential investments account for 73 percent of U.S. economy and constitute by far the largest GDP component directly impacted by the cost and availability of credit funds.

The question, therefore, is whether the U.S. monetary policy should now provide greater support to economic activity over the near term.

Technical analysis shows that the Fed’s present policy setting – reflected in its nominal effective federal funds rate of 3.64 percent – is neutral, i.e., neither expansionary nor contractionary.

But that policy neutrality becomes questionable because during the third quarter the Fed’s preferred inflation gauge – the core PCE index (personal consumption expenditure, excluding food and energy) shows an inflation rate of 2.9 percent. Over the same period, the PCE indicates the service sector inflation of 3.5 percent – a serious warning since services account for 90 percent of the U.S. economy.

“Affordability” and income distribution

The message here is that the Fed has no room for further easing – if it wants to deliver on its policy mandate of maximum employment and price stability. A fully employed economy is as far as the Fed can go, but price stability remains an apparently elusive policy target.

The solution here could be to address high and rising prices of food, energy, housing and healthcare as areas requiring fiscal and supply policy actions rather than using monetary easing that could make things worse.

With the U.S. being one of the world’s largest producer and exporter of agricultural and energy products, price tensions in domestic markets could be easily relieved by increasing food and energy supplies.

But housing and healthcare services are problems of the American welfare system struggling with “affordability” and rising income distribution inequalities.

Home prices have increased more than 50 percent over the last five years, and more than 30 percent of personal income is spent on housing.

Healthcare problems are even more serious. Leaving aside difficulties of accessing healthcare services, medical care costs last November were 3.3 percent higher that a year earlier. And Americans spent on healthcare in 2024 nearly 30 percent of their real disposable income.

So, before asking the Fed to cut interest rates to rev up the economy, one has to realize that lower interest rates alone cannot solve supply shortages and growing income inequalities.

The current U.S. debate about “affordability” is obvious when the costs of food, energy, housing and healthcare are rising much faster than real personal disposable incomes.

Income distribution has also become part of that debate. Some Fed governors believe that rising income inequalities nave been caused by extremely loose monetary policies in the past. They don’t know how to fix that problem, but the fact is that last year the U.S. income distribution index stood at 0.49, compared with an average of 0.32 in the rest of the G7 countries.

Fiscal policy and specific market supply interventions are needed to supplement the Fed’s prudent support of a steady and sustainable noninflationary growth. Acting alone, the monetary policy, with its blunt instruments operating with long and variable lags, cannot deal with “affordability” and increasing income distribution inequalities.